In the Democratic acceptance speech, we heard a lot of anachronisms. The ones I would like to focus on are statements on taxes and medicine. Senator Barack Obama has said that he will raise taxes on anyone who makes over $250,000 per year. He also said he would eliminate capital gains taxes on small business and start-ups. He favors a socialized medical establishment rather than an entrepreneurial market-based one. These statements are at odds with each other.
In the global economy, it is imperative that we foster innovation and entrepreneurs so we stay far ahead of the curve. These are the types of people and businesses that will grow to become economic drivers in the new economy. Our tax policy today does not do enough to encourage risk-taking and entrepreneurship. Obama’s tax plan shoots a howitzer and potentially blows up a $26-billion industry.
Apple, Microsoft, Sun, Cisco, and many others were nascent businesses in the 1980s. They came about because of technological revolutions and were fostered by risk-taking angels and venture capitalists that had incentives due to the Reagan revolution. We had an evolution that created whole communities like Silicon Valley. In order to prosper in the global economy, we need to continue to create these kinds of communities.
Why can’t it happen under an Obama tax plan? Isn’t profit enough of an incentive?
The problem with that assumption is that you are not accounting for the amount of risk one takes when they make an angel or venture investment. When you factor in risk, tax liability, and capital costs, a much greater return on investment is required. A higher bar means there will be fewer investments, meaning less innovation. At early stages it’s exceedingly difficult to pick winners and losers. An angel investor is considered successful if they have a profitable exit three out of every ten investments. Obama’s tax plan will restrict the amount of potential money available for investment and will limit the amount of investments made because of the increased rate of return needed to cash in.
But what about low/no capital gains on investments? In today’s tax code, there already is a provision that allows the investor to roll over from one investment to another tax-free or tax-diminished. Obama is proposing nothing earth-shattering here.